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OHIO-SEALY MATTRESS MFG. CO. v. DUNCAN

January 30, 1980

OHIO-SEALY MATTRESS MANUFACTURING CO. ET AL., PLAINTIFFS,
v.
LOUIS C. DUNCAN ET AL., DEFENDANTS.



The opinion of the court was delivered by: Aspen, District Judge.

  MEMORANDUM OPINION AND ORDER

This action represents yet another chapter in the seemingly endless antitrust litigation concerning Sealy, Inc. ("Sealy").*fn1 The principals herein are Sealy,*fn2 Ohio-Sealy Mattress Manufacturing Company ("Ohio"),*fn3 and Sealy Mattress Company of Oregon ("Portland").*fn4 Ohio filed this action against Sealy in July, 1979, alleging that Sealy, its directors, and licensees were engaged in a continuing conspiracy to effect a horizontal territorial allocation of the market for Sealy products. The complaint further alleges a breach of the fiduciary duty by the named directors of Sealy.

On November 19, 1979, Ohio sought leave to file a Supplemental Complaint consisting of two additional counts against Sealy arising from its decision to purchase Portland.*fn5 In August, 1979, Ohio entered into a stock purchase agreement with Portland. Pursuant to the agreement, the stockholders of Portland agreed to sell to Ohio all their shares for $7,250,000 and 112,500 shares of Ohio common stock. Sealy also agreed to indemnify each Portland stockholder up to the aggregate sum of $6,250,000 against any adverse judgment entered against them in the Sealy litigation.

In accordance with the Sealy License Agreement, Portland and Ohio notified Sealy of the intended acquisition. Sealy's board of directors met in September, 1979, to consider whether Sealy should exercise its right of first refusal. In early October, Sealy authorized the purchase of 112,500 shares of Ohio common stock in order to enable Sealy to match Ohio's offer if it so chose. By November 13, 1979, Sealy had succeeded in purchasing 112,500 shares of Ohio common stock on the open market. On that same day, the board of directors met and voted to purchase Portland by exercising the right of first refusal. Portland was notified of this action the following day, and chose to go forth with the sale to Sealy rather than exercise its right to withdraw the offer to sell. The closing date for the purchase was scheduled for January 3, 1980.

In its supplemental complaint of November 19, Ohio alleges that Sealy's exercise of the right of first refusal with respect to Portland failed to comply with the contractual requirements for an exercise of that right, constituted tortious interference with Ohio's contractual relationship with Portland, and violated federal antitrust law.*fn6 At the same time, Ohio filed a motion for a preliminary injunction, seeking to prevent Sealy from closing its purchase of Portland. On December 6, the Court assigned this, as well as an earlier related case involving Sealy,*fn7 to a magistrate for supervision of all pretrial matters, and for the submission of proposed findings of fact and conclusions of law with respect to the motion for a preliminary injunction. 28 U.S.C. § 636(b)(1)(A), (B).

The magistrate held an evidentiary hearing on the motion for preliminary injunctive relief for six trial days, from December 13-21, 1979.*fn8 During this period, Portland moved to intervene in the motion, alleging that its stockholders would be irreparably harmed if the sale were not permitted to close on January 3, 1980. Leave to intervene was granted, and Portland thereafter filed a document objecting to the attempt to enjoin the sale.*fn9 At the close of the evidentiary hearing, Ohio and Sealy stipulated to an extension of the closing date until January 31, 1980, an extension which is provided for in the purchase agreement.*fn10

On January 16, 1980, the magistrate issued his proposed findings of fact and conclusions of law. He concluded that there was a likelihood that Ohio would prevail on the merits of its antitrust claims, but not on its contract and tort theories. The magistrate also determined, however, that Ohio would suffer no irreparable harm if Sealy were allowed to close the sale and Ohio later prevailed on the merits. As to the balance of hardships, he found that the harm that would flow to Ohio from failing to enjoin the purchase was no greater than was the harm that would accrue to Sealy if an injunction were issued.*fn11 Finally, the magistrate concluded that issuance of an injunction would not be contrary to the public interest.

On the basis of these conclusions, the magistrate recognized that injunctive relief normally would fail to issue, since there was no proof of irreparable harm to the moving party. He observed, however, that the legality of Sealy's various licensing provisions — including the right of first refusal — currently is being litigated before another judge in this district.*fn12 Since the magistrate believed that the outcome therein might be determinative as to whether Ohio or Sealy is entitled to purchase Portland, he recommended that both Ohio and Sealy be enjoined from purchasing Portland pending the ruling in Sealy. Yet, due to the harm that might result to Portland from prolonged uncertainty as to the identity of the ultimate purchaser, the magistrate recommended that if a ruling on the equitable issues in Ohio-Sealy is not issued by April 30, 1980, then Sealy should be permitted to close its purchase with Portland at that time. Alternatively, the magistrate recommended that Sealy be permitted to close its purchase with Portland as scheduled on January 31, 1980, but that the closing should be subject to a "hold-separate" order which provides for the remedy of divestiture if Ohio prevails on the merits.

Pursuant to 28 U.S.C. § 636(b)(1), the parties were given ten days to file written comments on and objections to the magistrate's recommended findings and conclusions. All parties have done so.*fn13 Upon consideration of the evidence presented before the magistrate, his findings and recommendations, and the objections posed by the parties, the Court finds that Ohio is not entitled to an injunction prohibiting Sealy from closing its purchase of Portland. Rather, the Court adopts the magistrate's alternative recommendation, that the sale of Portland to Sealy be permitted to go forth on January 31, 1980, subject to a hold-separate order.

I. The Standards For Preliminary Injunctive Relief

A preliminary injunction is a vehicle by which the conduct of a party may be prohibited prior to any conclusive determination on the merits that the conduct in question is in fact illegal or inappropriate. For this reason, the case law has recognized that

a preliminary injunction is an extraordinary remedy "not to be indulged in except in a case clearly warranting it." Fox Valley Harvestore, Inc. v. A.O. Smith Harvestore Products, Inc., 545 F.2d 1096, 1097 (7th Cir. 1976). It is within the discretion of the Court to grant a motion for preliminary injunctive relief when the moving party satisfies its burden of persuasion as to each of the following prerequisites: (1) an inadequate remedy at law and irreparable harm in the absence of an injunction; (2) the threat of harm to the movant outweighs the harm that would result to the opposing party if an injunction issues; (3) at least a reasonable likelihood that the moving party will prevail on the merits; and (4) the public interest will not be disserved by the granting of injunctive relief. Fox Valley, 545 F.2d at 1097; see also Citizens Energy Coalition of Indiana v. Sendak, 594 F.2d 1158, 1162-1163 (7th Cir. 1979); Local Division 519, Amalgamated Transit Union, AFL-CIO v. LaCross Municipal Transit Authority, 585 F.2d 1340, 1351 (7th Cir. 1978).

A. Irreparable Harm and Inadequacy of Legal Remedies

It is beyond dispute that "[t]he basis for injunctive relief in the federal courts has always been irreparable harm and inadequacy of legal remedies." Sampson v. Murray, 415 U.S. 61, 88, 94 S.Ct. 937, 952, 39 L.Ed.2d 166 (1974); Beacon Theatres v. Westover, 359 U.S. 500, 506-507, 79 S.Ct. 948, 954-955, 3 L.Ed.2d 988 (1959); Fox Valley, 545 F.2d at 1098. At the outset, however, Ohio argues that this high standard need not be met in a case where the party seeking the injunction establishes a clear probability of success on the merits; that in such cases, it is sufficient to show merely a "possibility" of irreparable injury. Although there are some cases which suggest this less stringent standard of irreparable harm,*fn14 this has never been the rule in the Seventh Circuit.*fn15 It must be remembered that the conduct enjoined by a preliminary injunction is presumptively legal.*fn16 Indeed, this is why the preliminary injunction is considered an extraordinary remedy. Yet, adoption of plaintiff's "possibility" standard for determining irreparable harm would dilute seriously the extraordinary nature of injunctive relief by making it more readily available.*fn17 Moreover, it would do so without advancing the underlying purposes of preliminary injunctions. A movant needs the protection of a preliminary injunction only when threatened with injury that could not be remedied even if in the future he prevailed on the merits. If a movant cannot persuade the court that there is more than a mere "possibility" of such harm, then he should not be entitled to the benefits of preliminary injunctive relief.

Ohio argues that it will suffer irreparable harm in three ways if an injunction does not issue. First, it argues that if it prevails at trial, it will be unable to prove fully the amount of profits it lost as a result of the unlawful acquisition of Portland. Not only will it be impossible to determine the extent to which Ohio could have increased the sales within Portland's area of primary responsibility (APR),*fn18 but it also will be impossible to calculate the profit that Ohio would have made from sales outside the Portland APR.

It is true that difficulty in ascertaining the correct amount of damages is relevant in determining the existence of irreparable harm. And there have been instances in which the inability to calculate future losses has resulted in a finding of irreparable harm. See Danielson v. Local 275, 479 F.2d 1033, 1037 (2d Cir. 1973); Interphoto Corp. v. Minolta Corp., 417 F.2d 621, 622 (2d Cir. 1969); Supermarket Services, Inc. v. Hartz Mountain Corp., 382 F. Supp. 1248, 1256 (S.D.N.Y. 1974). However, it also is recognized that there is broad latitude in establishing damages in private antitrust actions. Jack Kahn Music Co., Inc. v. Baldwin Piano & Organ Company, 604 F.2d 755, 763 (2d Cir. 1979); Triebwasser & Katz v. American Telephone & Telegraph Co., 535 F.2d 1356, 1359 (2d Cir. 1976). While the amount of damages may not be calculated solely on the basis of mere speculation or guesswork, neither is it required that the damages be based on mathematical certainties. Rather, the finder of fact "may make a just and reasonable estimate of the damage based on the relevant data presented at trial and render its decision accordingly." Bailey v. Meister Brau, Inc., 535 F.2d 982, 991 (7th Cir. 1976).

The Court believes that such an estimate is possible in this case. Indeed, it is more than a little disingenuous for Ohio to suggest otherwise. In Ohio-Sealy Mattress Manufacturing Co. v. Sealy, Inc., 585 F.2d 821 (7th Cir. 1978), cert. denied, 440 U.S. 930, 99 S.Ct. 1267, 59 L.Ed. 486 (1979), Ohio in fact devised a method for calculating its lost profits resulting from increased sales it would have earned had Sealy not purchased an intended acquiree by invoking its right of first refusal. This method involved application of a representative Ohio plant profit margin to the sales actually made by Sealy after acquisition. The fact that the Seventh Circuit allowed this calculation to stand reflects its view that the method provided a sufficiently precise measure of damages. Ohio-Sealy, 585 F.2d at 833 n. 18. In addition, it must be observed that Ohio owns five subsidiaries in various regions of the country. Thus, there is a wealth of comparative data from which Ohio — and a fact finder — can draw inferences as to the amount of damages suffered by Ohio's inability to purchase Portland as planned.*fn19 Establishment of damages by this method might well be inexact in a mathematical sense. But so long as it is a "just and reasonable estimate," Ohio cannot claim that the harm from this imprecision is irreparable.

Moreover, even if the Court were to conclude that the damages were irreparable due to the inability to calculate accurately the lost profits, it would be inappropriate to issue an injunction on this basis. It is clear that injunctive relief should not be granted if it would be unavailing in preventing the irreparable harm of which the movant complains. Mullis v. Arco Petroleum Corporation, 502 F.2d 290, 293 (7th Cir. 1974). In this case, Ohio alleges that it will be deprived of adequate compensation for the profits it would have made had it been able to purchase Portland as planned. Thus, the harm stems from Ohio's inability to obtain Portland now, not from Sealy's imminent purchase of Portland. An order enjoining Sealy from closing on its purchase of Portland in no way would forestall this harm.

Ohio appears to recognize this, as it now asks the Court not only to enjoin Sealy's scheduled purchase of Portland, but to declare that Ohio should be permitted to purchase Portland on January 31, 1980. This, of course, the Court cannot do. Although a great deal of evidence was adduced before the magistrate, this action still is in a very preliminary posture. Should the case go to trial, the parties no doubt will introduce a great deal more evidence, particularly on the antitrust claims. Only then will it be appropriate for the Court to determine conclusively who shall have the right to purchase Portland. Until that time, the right of first refusal is a legal right conferred upon Sealy by the licensing ...


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